a liquidator's entitlement to remuneration out of insurance
proceeds, in light of the recent decision of Morgan, Re
Brighton Hall Securities Pty Ltd (in liq).

Please do not hesitate to contact us if you would like more
information on any topic, whether covered in this newsletter or
not. We hope you find the newsletter informative and
useful.

Voidable transactions and distressed restructures

Often a corporate restructure of a distressed company, whereby
its assets are transferred into a new corporate vehicle, will
involve a transaction with a secured creditor. Such a transaction
may even include the transfer of the secured creditor debt to the
new company.

This article considers a recent case on voidable transactions
and how these may affect restructuring transactions in the
distressed space.

Ashington Bayswater Pty Limited (in
liq)[2013] NSWSC 1008

The recent case of Ashington Bayswater Pty Limited (in
liq) [2013] NSWSC 1008 highlights the potential for
transactions between related parties to be voided under Part 5.7B
of the Corporations Act2001 (Cth)
(Act), even if entered into sometime before the
insolvency (in this instance, one transaction was entered into some
15 months before the filing of a winding up application).

Facts

In September 2010, Ashington Bayswater Pty Limited
(Company) entered into a deed of
charge (Charge) with an unsecured creditor,
Bayswater Capital (Bayswater). Bayswater was a
related party. The Charge had the effect of securing existing debt
owed by the Company, thereby changing Bayswater's status from an
unsecured to a secured creditor.

In a separate transaction in June 2011, Bayswater and the
Company entered into a Deed of Assignment whereby the Company
assigned to Bayswater the right to a potential claim of $1,000,000
in consideration for a reduction of the debt owed by the Company to
Bayswater in the amount of $325,000
(Assignment).

A creditor's winding up application was filed on 22 December
2011 and a liquidator was appointed in February 2012.

The liquidator then filed a claim against Bayswater on the basis
that the Charge was either an unfair preference or an uncommercial
transaction and, therefore, voidable under sections 588FA and 588FE
of the Act.

In respect of the unfair preference claim, the liquidator argued
that the Charge converted Bayswater into a secured creditor of the
Company, conferring an additional benefit on Bayswater that
resulted in it receiving more from the Company in the liquidation
than it would have received had it proved for its debt in the
winding up of the Company.

In the alternative, the liquidator claimed that the Charge was
an uncommercial transaction, because the Company granted security
to an unsecured creditor for past advances without obtaining a
genuine commercial benefit.

The decision

The court agreed with the liquidator on both counts, finding
that the Charge was both an unfair preference and an uncommercial
transaction. Justice Black observed that: 'this transaction
involved a bargain for Bayswater Capital of such a magnitude that
it cannot be explained by normal commercial practice'.

His Honour found that the Company was insolvent in June
2010.

The court therefore determined that the Charge was an insolvent
transaction and voidable under sections 588FC and 588FE of the
Act.

The effect of the finding that the Charge was void meant that
the benefit received by Bayswater under the Assignment was a
preference: ie, Bayswater received more from the Company under the
assignment than it would have received had it proved for its debt
in the winding up.

Hence the court held that the Assignment was also an insolvent
and voidable transaction under sections 588FC and 588FE of the
Act.

Important points for distressed
restructures

The Bayswater case illustrates that transactions between related
parties are liable to be undone whenever the consideration for
entry into the transaction is inadequate or insufficient. In
respect of corporate restructures in the distressed space, when
reviewing or undertaking any transaction involving the distressed
company and the secured creditor, it is crucial to not only look at
underlying securities, but at the transaction giving rise to the
security itself. This will assist the identification of potential
issues under Part 5.7B of the Act - especially when the
transactions occur between related parties.

For example, in many distressed restructures, the secured
party's debt may be assumed by the new company, usually in
consideration for assets of the distressed company. If the secured
party's security is voidable, this may render any benefit received
by the secured party preferential to the unsecured creditors of the
distressed company - thereby affecting the commerciality of the
transfer of assets to the new company. From a liquidator's
perspective, this may give rise to a claim that the sale of the
distressed company's assets to the new corporate vehicle is
voidable.

It is vital to any distressed restructure transaction involving
a secured creditor that their security be scrutinised and tested
during the due diligence phase to ensure there is no potential for
the transaction to be undone by a liquidator.

Authored by Nick Amore, Cornwall Stodart

Update: accountants' occupational liability schemes

On 2 September 2013, the limitation of liability scheme that
covered Victorian members of the Institute of Chartered Accountants
in Australia expired. An interim scheme was approved by the
Professional Standards Council and comes into force on 7 December
2013. The interim scheme is gazetted to expire on 7 October 2014.
As a result, Victorian chartered accountants were exposed to
unlimited liability for claims regarding the performance of their
occupation between 2 September 2013 and 7 December 2013.

The ICAA has started working on preparing a new application for
a long-term scheme, to run for a period of 3-5 years. Lodgement of
the scheme is expected by the beginning of March 2014.

The limitation of liability scheme that covers members of CPA
Australia in Victoria has been extended to 20 April 2014. New South
Wales has implemented a new scheme, which commenced on 8 October
2013 and is intended to be the template for all CPA schemes in
future.

Schemes

Since 2008, occupational liability claims against eligible
chartered accountants and CPAs have been limited by schemes enacted
under the Professional Standards Legislation. The schemes cover
only occupational liability - that is, 'civil liability arising in
tort, contract or otherwise directly or vicariously from anything
done or omitted by a member of an occupational association acting
in the performance of his or her occupation'.

The schemes limit liability for each single cause of action
against an accountant to an amount equal to 10 times a
'reasonable charge' for the services provided by the accountant or
that the accountant failed to provide and to which the cause of
action relates.[1]

Accountants may rely on the schemes to limit their exposure to
claims brought by their clients, provided they satisfy certain
insurance and financial thresholds and have:

(a) provided the client with a statement
indicating that their occupational liability is limited by
operation of the schemes; or

(b) otherwise informed the client that the
auditor's liability was limited in accordance with the
schemes.[2]

Liability caps

Different liability caps apply to different types of work. The
liability caps discussed below apply to work including any work
conducted in the capacity of an auditor and any work that will be
incorporated into financial reports.

The liability caps only operate where the damages arising from a
single cause of action exceed:

(a) $500,000 where the act or omission giving
rise to the cause of action occurred on or before 30 June
2008;

(b) $750,000 where the act or omission giving
rise to the cause of action occurred between 1 July 2008
and 30 June 2009; or

(c) $1 million where the act or omission
giving rise to the cause of action occurred after
1 July 2009.

ICAA interim scheme

In its interim scheme, the ICAA has introduced a separate
liability cap of $75 million for:

and maintains the liability cap of 10 times a 'reasonable
charge' for all other participants.

CPA New South Wales scheme

The NSW 2013 scheme only affects the occupational liability of a
participant for damages arising from a cause of action to the
extent that the liability results in damages exceeding $2
million.

The liability cap for auditors and for work to be incorporated
into financial reports varies according to the size of the auditing
practice and no longer refers to multiple fees.

(a) For accounting
practices (that as at the 30 June immediately preceding the acts or
omissions giving rise to the liability) consisting of less than 20
principals and that generated total annual fee income for the
financial year ended on that 30 June of less than $10 million, the
cap is $2 million.

(b) For accounting
practices that as at the relevant 30 June had greater than 60
principals or generated total annual fee income greater than $20
million, the cap is $75 million.

For all other practices, the cap is $10 million.

Multiple claims

The schemes limit only the amount of damages that may be awarded
for a single claim. They do not limit the total amount of damages
that may be awarded for all claims arising from a single event.[3]
For example, if a shareholder and an investor both suffered loss or
damage as a result of an auditor's failure to pick up a material
misstatement in a company's financial report, each would have a
cause of action against the auditor and would separately be able to
claim damages up to the liability cap.

Separate claims by two or more persons who have a 'joint
interest' in a cause of action founded on the same act or omission
are treated as a single claim for the purposes of the Professional
Standards Legislation.[4] For example, if multiple shareholders
each suffer loss and damage as a result of an accountant's
negligence, they would be treated as having a single claim against
the accountant and would collectively be entitled to claim damages
up to the relevant liability cap.

Individual parties are entitled to bring multiple claims for
compensation under separate heads of damage, but cannot avoid the
liability cap by bringing separate claims for causes of action that
resulted in the same loss or damage.

Conclusion

Chartered accountants and CPAs should be aware of the changes
underway regarding limitation of liability schemes and check that
their insurance is sufficient to meet any potential claims.

If you would like further advice on the operation of the schemes
or a particular claim, please contact us.

Authored by Rena Solomonidis and David
Markham

[1] Part 3 of the Institute of Chartered Accountants in
Australia (Victoria) Scheme and its equivalents; Part 3 of the CPA
Australia Ltd (Victoria) Scheme and its equivalents

[2] Section 30(2) of the Professional Standards Act
2003 (Vic) and its equivalents

[3] Section 31(1) of the Professional Standards Act
2003 (Vic) and its equivalents

[4] Section 31(2) of the Professional Standards Act
2003 (Vic) and its equivalents

A recent decision of the Supreme Court of Queensland in
Bluecove Pty Ltd v Gowinta Farms Pty Ltd[1] should be a
caution to a liquidator considering issuing a statutory demand to
recover putative debts due to the company.

A statutory demand issued against a debtor pursuant to s 459E of
the Corporations Act2001 (Act)
can be a relatively quick and cost-effective means of recovering an
undisputed debt. The statutory demand process can avoid lengthy and
expensive legal proceedings and will often result in the debtor
agreeing to some arrangement to repay the debt. However, the courts
have consistently maintained the view that statutory demands are
not to be used as debt-collection devices. Further, although the
normal rule that party/party costs follow the event applies to most
statutory demand proceedings, the courts are far more willing to
award indemnity costs against the party issuing the statutory
demand in circumstances where the court views the issuing of the
demand as being inappropriate.

Facts

In Bluecove, the liquidator of the putative creditor
company (company) issued a statutory demand
against a putative debtor company (debtor). The
debtor applied pursuant to s 459G of the Act for an order that the
statutory demand be set aside. The court found that there was a
genuine dispute and an off-setting claim regarding the debt, and
set aside the statutory demand pursuant to s 459H.

It transpired that:

an ongoing trading relationship existed between the company and
the debtor. The liquidator had approached the debtor earlier for
funding regarding the winding up;

an employee of the liquidator contacted the director of the
debtor by telephone and demanded payment of the debt. The director
informed the employee that the money was not owed, and listed
various claims that the debtor asserted it had against the company.
The employee informed the director that the liquidator 'was not
responsible for those claims';

without a letter of demand or other written warning being made
first, the liquidator served a statutory demand on the putative
debtor; and

the liquidator did not file any affidavit material in response
to the application to set aside the
demand.

Decision

The court was of the view that the liquidator had acted in a
highhanded manner in issuing the statutory demand without at least
seeking to ventilate the issues in dispute with the putative debtor
first. His Honour Daubney J also found that it was appropriate to
make an order that the liquidator pay the costs of the proceedings
personally, relying on Belar Pty Ltd (in liq) v Mahaffey
[2000] 1 Qd R 477.

In Belar, the Queensland Court of Appeal noted that
when an insolvent company, under the control of a liquidator,
unsuccessfully brings litigation against another party, a simple
order for costs against the company would carry a considerable
risk, and in some cases a virtual certainty, that the costs would
not be recovered. The most usual order in such a case is that the
liquidator pays the costs, and it is recognised that this makes the
liquidator personally liable for such costs.

Comment

There is no question that the courts have the power to order
that the costs of a proceeding be paid personally by an insolvency
practitioner, where he or she was not a party to the proceedings,
in circumstances where the insolvency practitioner is the
'effective litigant' standing behind the company (Knight v FP
Special Assets (1992) 174 CLR 178). However, it is unusual for
a costs order to be made against a liquidator regarding proceedings
brought against the company in liquidation, to which the liquidator
was not personally a party - in other words, where the company is a
defendant to the proceeding (see InRe Wilson Lovatt
& Sons Ltd [1977] 1 All ER 274 at 285, Cuthbertson
& Richards Sawmills Pty Ltd v Thomas (No 2) (unreported
Federal Court of Appeal 21 December 1999).

Although an application to set aside a statutory demand is a
proceeding against the company in which the company is a defendant,
the proceeding is also one necessitated by the company's action in
issuing a statutory demand. In Aquatown Pty Ltd v Holder Stroud
Pty Ltd (1995) 18 ACSR 622, Sundberg J found that while an
applicant seeking to set aside a statutory demand is a 'plaintiff'
in the ordinary sense of the word, in a practical sense the
applicant is the party 'attacked' and in reality is forced to make
the application to set aside the statutory demand to avoid the
statutory presumption of insolvency (see also Classic Ceramic
Importers Pty Ltd v Ceramica Antiga SA (1994) 13 ACSR
263).

In light of the decision in Bluecove, liquidators
should carefully consider whether a statutory demand is an
appropriate means of recovering a debt. Although issuing a
statutory demand without advance warning gives some tactical
advantage to a creditor (in that the debtor has a very short (21
day) period within which it must respond), we suggest that sending
a written letter of demand as a precursor to issuing a statutory
demand is a prudent step in any debt recovery proceeding, for these
reasons:

a letter of demand may elicit from the debtor a response that
is indicative of a genuine dispute or offsetting claim, which
allows the liquidator to better assess the risks of
proceeding;

a letter of demand may not elicit a response from a debtor, in
which case the liquidator's position will be strengthened in any
subsequent application to set aside the demand; and

the liquidator may protect him or herself from an indemnity
costs order being made against the company, and also from an
adverse personal costs order.

Liquidator's entitlement to remuneration out of insurance
proceeds

One of the key assets often available for distribution in the
winding up of a company is proceeds from an insurance policy.

This article considers a recent case regarding a liquidator's
entitlement to remuneration out of such proceeds.

Morgan, Re Brighton Hall Securities Pty Ltd (in
liq) [2013] FCA 970

In Morgan, Re Brighton Hall Securities Pty Ltd (in liq)
[2013] FCA 970, Mr Morgan, the liquidator of Brighton Hall
Securities Pty Ltd (in liq) (Company), sought
advice from the court as to the manner in which proceeds under an
insurance policy should be distributed.

The Company was a financial services provider and it
recommended, to at least 171 clients, that they invest in
development schemes created by the Westpoint Group of companies.
The Westpoint Group subsequently collapsed and ASIC caused two
proceedings (the Casey Proceeding and the Lawrence Proceeding) to
be issued on behalf of investors in Westpoint Group products.

The Casey Proceeding was commenced against the trustee company
for holders of mezzanine notes issued by a company in the Westpoint
Group (trustee). The basis of the claim was that
the trustee had failed to exercise reasonable diligence regarding
the investment and had breached its trustee duties. The claim was
settled with the requirement that the trustee pay $13.5 million to
ASIC (for distribution to investors) on the basis that the trustee
could continue with any cross-claims. The Company became involved
in this proceeding by the trustee bringing a cross-claim against it
for indemnity and/or contribution.

The Lawrence Proceeding was commenced against the Company on
behalf of investors in other investment products issued by the
Westpoint Group. The claims were brought against the Company on the
basis of negligent advice, misleading or deceptive conduct, and
negligent misstatement.

The claims against the Company by the trustee in the Casey
Proceeding and ASIC (on behalf of investors) in the Lawrence
Proceeding significantly exceeded the full amount payable under the
Company's professional indemnity insurance. The liquidator, on
behalf of the Company, and the insurer entered into a settlement of
any claim by the Company for indemnity pursuant to the policy. The
insurer paid $2 million to the Company, the maximum payable under
the policy.

Under the agreement, the liquidator agreed that the proceeds
were received as an amount in respect of the Company's liability to
third parties within the meaning of s 562 of the Corporations
Act 2001 (Cth) (Act). Section 562 directs
that proceeds under a contract of insurance against liability to a
third party must be paid to that third party (after deduction of
expenses) in priority to all other creditors.

Mr Morgan's intention was to:

A
first, pay all costs and expenses (including remuneration) that he
was entitled to deduct under section 562 of the Act and as
otherwise permitted by the court; and

B
secondly, following an assessment of proofs of debt and taking into
account the court's directions, pay to those third parties whose
proofs were accepted for payment from the insurance proceeds.

ASIC opposed Mr Morgan taking his remuneration from the
proceeds.

The court found that Mr Morgan was entitled to costs and
expenses including his reasonable remuneration from the proceeds on
the basis of an equitable lien or, alternatively, section 562 of
the Act.

In respect of the lien, the court found that Mr Morgan should be
entitled to remuneration from the proceeds, given that he had
undertaken the work to make sure the proceeds were available to
creditors. Creditors take the benefits of the liquidator's work;
hence they should expect that reasonable remuneration will be
incurred.

Under section 562 of the Act, the proceeds of an insurance
policy received by the Company or the liquidator 'must, after
deducting any expenses of or incidental to getting in that amount,
be paid by the liquidator' to the claimants in respect of whom the
liability was incurred. The court held the expenses of or
incidental to getting in the proceeds included Mr Morgan's
remuneration.

Mr Morgan and the parties agreed that he would apply to the
court for approval of his remuneration.

Impact

Liquidators should be encouraged by this decision because it
shows that courts will generally be favourable to claims for
remuneration out of funds brought in by work completed by
liquidators. The imposition of an equitable lien on the insurance
proceeds also shows that the courts are not restricted to the Act
in allowing a liquidator's right to remuneration. If a liquidator
has completed work that has resulted in further funds available for
distribution, consideration should always be given to the
liquidator's right to remuneration out of the funds. In situations
where the right is not clear, it may be appropriate to apply to the
court - as Mr Morgan did - for directions.

Team member profile

Stephen Sawer, Partner, Reconstruction &
Insolvency

Stephen is the newest Partner in
our Reconstruction & Insolvency team, having recently
joined the partnership. He has over 30 years' experience in
commercial and corporate litigation, with a focus on reconstruction
and insolvency. He has worked closely with various financial
institutions and is often sought by commercial clients to assist in
identifying and managing risks.

Stephen authored the Australian component of Practical Law
Company Handbook on Restructuring and Insolvency
2009-2010.

He is a regular speaker at seminars on litigation and insolvency
issues.

Stephen brings to the firm a wealth of experience to complement
our existing Reconstruction & Insolvency and Commercial
Litigation teams. His arrival adds strength and a new dimension to
these areas of the firm.

For further information about Stephen's experience, visit his profile on our website.